Homework Chapter 11

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Embry-Riddle Aeronautical University *

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Feb 20, 2024

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Problem 1 Troy Industries purchased a new machine three years ago for $80,000. It is being depreciated under MACRS with a five-year recovery period. Assume a 21% tax rate. 1. Use MACRS table below to calculate the book value of the machine. 2. Calculate the firm’s tax liability if it sold the machine for each of the following amounts: $100,000; $56,000; and $15,000.

Problem 2 Samuels Manufacturing is considering the purchase of a new machine to replace one it believes is obsolete. The firm has total current assets of $920,000 and total current liabilities of $640,000. As a result of the proposed replacement, the following changes are anticipated in the levels of the current asset and current liability accounts noted. Using the information given, calculate any change in net working capital that is expected to result from the proposed replacement action.

Problem 3 Vastine Medical Inc. is replacing its computer system, which was purchased two years ago at a cost of $325,000. The system can be sold today for $200,000. It is being depreciated using MACRS and a five-year recovery period. A new computer system will cost $500,000 to purchase and install. Replacement of the computer system would not involve any change in net working capital. Assume a 21% tax rate. 1. Calculate the book value of the existing computer system (use MACRS table from previous exercise) 2. Calculate the after-tax proceeds of its sale for $200,000. 3. Calculate the initial cash flow associated with the replacement project. Problem 4 Looner Industries is currently analyzing the purchase of a new machine that costs $160,000 and requires $20,000 in installation costs. Net working capital will increase immediately by $30,000, but those funds will be recovered at the end of the machine’s life. The firm plans to depreciate the machine under MACRS, using a five-year recovery period (use MACRS table from previous exercise), and expects to sell it to net $10,000 before taxes at the end of its usable life. The firm is subject to a 21% tax rate. Calculate the terminal cash flow for a usable life of three years

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Problem 5 Lombard Company is contemplating the purchase of a new high-speed widget grinder to replace the existing grinder. The existing grinder was purchased two years ago at an installed cost of $60,000; it was being depreciated under MACRS, using a five-year recovery period. The existing grinder will have a usable life of five more years. The new grinder costs $105,000 and requires $5,000 in installation costs; it has a five-year usable life and will be depreciated under MACRS, using a five-year recovery period. Lombard can currently sell the existing grinder for $70,000 without incurring any removal or cleanup costs. To support the increased business resulting from the purchase of the new grinder, accounts receivable will increase by $40,000, inventories by $30,000, and accounts payable by $58,000. At the end of five years, the existing grinder will have a market value of zero; the new grinder will be sold to net $29,000 after removal and cleanup costs and before taxes. The firm is subject to a 21% tax rate. The estimated earnings before interest, taxes, depreciation, and amortization over the five years for both the new and the existing grinder appear in the following table. (Use MACRS from previous exercise) 1. Calculate the initial cash flow associated with the replacement of the existing grinder by the new one. 2. Determine the periodic cash flows associated with the proposed grinder replacement.

3. Determine the terminal cash flow expected at the end of year 5 from the proposed grinder replacement. 4. Depict on a timeline the project cash flows associated with the proposed grinder replacement decision.